Credit Card Debt: Over the Limit

Part VI of the Credit Card Series: Start at the beginning if you missed a part.

More Than I can Handle

Even the most algebra-phobic credit card holder can use the formula from Part V to figure out what his tolerance for credit card debt is. Do you have your number? Look at your credit card statements. Do they add up to a lower number? Pay wisely, spend cautiously (if at all) and be debt free in about a year.

Cut up the credit card

This does not equal closing the account.

Do they add up to a higher number? Time for a step-by-step get-out-of-debt plan.

Higher or lower, stop incurring credit card debt. Do not use your card for routine purchases. Keep the card in a safe place, but do not close the account. If you cannot refrain from spending, cut the card, leaving the account open.

Step One:
Assess Ability to Pay

You know what your personal savings are each month. If one-half of your personal savings is less than the 10% of your debt, cut the amount you put into your savings to one-third. Saving money at this point is still as important as before, but you need to get out from under the debt. If you still cannot meet the 10% payment, cut your savings more. Try not to get under one-quarter.

Step Two:
Raise Your Minimum

After the Federal regulations changed in 2003, credit card issuers adopted the industry standard of a 2% minimum. Only 4-5% of Americans pay only the minimum payment. They will be in debt for a long time.

If you are only paying 2% of your balance, it will take you five to ten years¹ to pay off your credit card, even if you never charge anything on it again. If you are paying 10% of your balance each month, you will pay off your credit card debt in 12-18 months, depending on your interest rate and fees.

Step Three:
Pay on Time

Late payments are one of the most damaging items on your credit report. They can drop your score 10-30 points on one account. They also cost you money. Late payments incur fees and interest. The drop in your credit score will cost you money on your next loan in the form of a higher interest rate. Solution: Pay on time, every time.

Step Four:
Add Lump Sums

Make lump sum payments on top of your monthly payments. Where can you find lumps sums?

  • Short-term projects which produce overtime pay
  • Tax refunds
  • Deposit refunds
  • Gifts
  • Sales: yard, rummage, vehicle, property
  • Additional jobs
  • End of the month surplus
  • Bonus

Step Five:
Step out of Credit Card Debt

If you have been following the steps each month, you can leave credit card debt behind. By not incurring debt while you pay it off, you are racing toward more savings and a healthy debt-to-credit ratio. In the event you need the credit, it will be there waiting for you.

(1) Time variance is based on variables in credit card terms, including interest rate, annual fee, insurance premiums and other card-related fees.

NEXT: Tricks to keep from spending too much on your credit card.


© Red Dwyer 2011
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  1. Credit Card Debt: Over the Limit | Finance Made Personal |
  2. Never Put This on Your Credit Card | Momma's Money Matters

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